Moody's puts Ford on review for possible downgrade

Moody's Investors Service placed the A3 long-term rating of Ford Motor Co., and the A2 long-term and Prime-1 short-term ratings of Ford Motor Credit Co. under review for possible downgrade. Moody's also placed the Baa1 long-term rating of Hertz under review for possible downgrade. The review follows Ford's announcement of a revitalization plan. Moody's anticipates completing its review before Ford sells the proposed $3 billion of convertible preferred securities that are part of the plan.

The review will consider the increasingly challenging environment in which Ford operates, the need for significant cost reductions to succeed in this environment and the extent to which the revitalization plan will enable Ford to generate sufficient cash flow and debt protection measures during 2003 and beyond. The review will also assess the potential that the underwriting standards and financial strategy of Ford Motor Credit might require additional capital contributions to the finance company beyond those contemplated in the plan. Moody's said it expects the initiatives will reduce Ford's cost structure, help restore profitability during 2003 and ensure ample near-term liquidity.

Despite these benefits, the competitive and operating environment that Ford faces in its domestic and international markets continue to be increasingly challenging and may limit the company's ability to generate revenues and returns that support the current ratings even after the plan has been fully implemented and the global automotive markets begin to recover during 2003. In order for Ford to sustain the A3 long-term rating, this plan must enable the company to generate a strong recovery in earnings and cash generation after the current downturn.

Ford Motor Credit's ratings are closely linked with Ford's given the interrelationship and business ties between the two firms. If Ford's ratings are lowered, Ford Motor Credit's long-term and short-term ratings would be lowered, although the one notch rating differential between the two firms' long-term ratings is expected to be maintained. Ford Motor Credit's early December announcement regarding its decision to increase its loss reserves was unexpected and raises concerns regarding asset quality, Moody's noted. The review of the Hertz rating reflects the significant operational and financial relationship between Hertz and Ford, as Hertz is the single largest buyer of Ford vehicles.

S&P affirms Ford, but revises outlook to negative

Standard & Poor's affirmed its ratings on Ford Motor Co., Ford Motor Credit Co. and their related entities, but the outlook for both companies was revised to negative from stable. S&P also affirmed its ratings on Ford's 100%-owned subsidiary Hertz Corp., and revised its outlook to negative from stable.

S&P said that since it lowered these ratings on Oct. 15, the extent of the company's competitive shortcomings has become more apparent. Sharply intensified price competition in North America has underscored the weaknesses of Ford's product offerings and operating efficiency. In addition, Ford Credit is experiencing a steeper-than-expected increase in credit losses, in large part a result of the past aggressiveness of its underwriting policies. Under Ford's new management, an extensive turnaround plan has been developed, but S&P said Ford faces severe challenges in implementing this plan, not least of which is a difficult industry environment.

To date, Ford's liquidity has been preserved through improvements to working capital management and reductions to capital expenditures and the common dividend, S&P noted. A series of additional measures announced Friday - including an additional cut in the common dividend, the planned sale of $1 billion of non-strategic assets and a proposed $3 billion issuance of convertible trust preferred convertible securities - will further help to maintain near-term financial flexibility. However, S&P said it views Ford's overall financial leverage as aggressive. In the wake of the recent increase in its credit losses, one particular concern is Ford Credit's high debt-to-equity and thin coverage of credit losses by reserves, which will be addressed only to a very modest extent by a planned equity infusion into Ford Credit and recent reserve additions.

S&P said that, if at any point during this year it comes to doubt that Ford is on a trajectory toward at least breakeven pre-tax earnings before special items, the ratings could be lowered. The ratings could also be lowered if Ford is unable to maintain positive net liquidity, or if Ford were to allow the financial leverage of Ford Credit to become even more aggressive, S&P said.

Fitch cuts Ford senior debt to BBB+ from A-

Fitch cut the credit rating on Ford Motor Co.'s and Ford Credit Co.'s senior debt to BBB+ from A-, and the ratings on Ford's preferred securities to BBB- from BBB+, citing the automaker's weak profits, shrinking market share and deteriorating liquidity. The commercial paper ratings of both Ford and Ford Credit were affirmed at F2. The rating outlook for all securities is negative, Fitch said.

Looking forward, Ford will be challenged to reverse recent operating losses, Fitch said. Although the company has announced a further major cost-reduction program, the ability to dramatically reduce the company's cost structure is limited under the company's union contract that extends through September 2003. The bulk of the benefits from the company's cost reduction program will not occur over the next several years, and full realization of the program's benefits will be largely dependent on operating execution and the form of the next union contract - both of which remain uncertain.

Ford retains a healthy cash position and extended debt maturities, which provide some cushion for the company to reverse current trends, Fitch noted. Net liquidity at Sept. 30 stood at about $3.1 billion, but Fitch said it expects the company will enter into a net debt position during 2002, excluding any potential new capital. The high-fixed-cost nature of the auto business means that a further deterioration in operating performance could lead to a rapid decline in the company's liquidity position, Fitch said.

In addition to issues at the parent company, Ford Motor Credit has also experienced surprising weakness in certain segments of its financing business brought on by both higher default frequency and loss severity given the weakened economic environment, Fitch said. To bolster declining capitalization, the financing arm has suspended dividend payments to Ford Motor Co. and the parent company is expected to contribute $700 million of new equity into Ford Motor Credit. In light of Ford's ownership of Hertz, the ratings of both companies are linked, Fitch said.

Moody's rates new Best Buy convertible at Ba1

Moody's Investors Service assigned a rating of Ba1 to Best Buy Co. Inc.'s $350 million convertible subordinated debentures and confirmed the company's senior unsecured rating at Baa3. Best Buy's ratings reflect the strong and growing market position of the core Best Buy stores, the national presence the company has in the U.S. and Canada, a track record of prudent financial management and management's focus on inventory productivity and turns. The rating outlook is stable, which reflects the increased level of operational and financial risk resulting from its acquisitions of Musicland Stores and Future Shop. Further, the outlook reflects the on-going operational improvement at the Best Buy stores, particularly in light of a challenging retail environment, and an expectation that Best Buy will continue to outperform many of its peers and gain market share, Moody's said.

Fitch cuts WorldCom convertibles to BBB

Fitch lowered the rating on WorldCom Inc.'s senior unsecured debt to BBB+ from A-, and cut the rating on its convertible preferred securities and quarterly income preferred securities to BBB from BBB+. The rating action also applies to Intermedia Communications senior unsecured debt, which was lowered to BBB from BBB+. The rating outlook is stable.

Fitch affirms Anixter convertibles at BB+

Fitch affirmed its BBB- rating of Anixter Inc.'s senior notes and its BB+ rating of Anixter International Inc.'s zero-coupon convertible notes. The rating outlook remains stable. Fitch said the ratings reflect Anixter's strong market position, attractive long-term growth prospects, solid operating cash flow before working capital investment and modest capital spending requirements. The affirmations also recognize Anixter's ability to reduce debt and leverage during the current market downturn, assuring maintenance of a solid credit profile. Prudent financial management has been shown by timely restructuring actions to restore operating margin, the suspension of share repurchases since the first quarter of 2001, the lack of significant acquisitions and successful working capital management, Fitch said. The company's substantial cash flow and balance sheet improvements have been used to reduce debt, offsetting the adverse conditions continuing in the company's end markets.

Fitch said it recognizes that Anixter's operating performance is affected by ongoing adverse conditions in the general economy and in its primarily communications-oriented end markets, but notes that credit metrics are somewhat stabilized by the counter-cyclical nature of working capital requirements. Fitch expects eventual resumption of growth in Anixter's business. As a result, the ratings recognize potential requirements for increased working capital, which could stop or reverse the current trend in improving credit metrics.

S&P rates Stelco convertible at B

Standard & Poor's assigned a B subordinated debt rating to Stelco Inc.'s C$90 million convertible subordinated debt issue due Feb. 1, 2007. At the same time, S&P assigned its preliminary BB- senior unsecured debt rating and preliminary B subordinated debt rating to the company's C$300 million shelf. Also, the ratings outstanding on the company, including the BB- corporate credit rating, were affirmed. The outlook is negative, S&P said.

The ratings on Stelco - the largest steel producer in Canada - reflect a weakened financial profile due to the effect of the ongoing economic downturn and the prevailing difficult steel industry conditions on its financial results, offset by the company's fair business position. If the current economic downturn continues and difficult steel industry conditions persist, resulting in further deterioration in the financial profile, the ratings could be lowered, S&P said.

Fitch affirms Household ratings, cuts finance unit

Fitch affirms all its outstanding ratings on Household International Inc., but lowered the senior debt rating of Household Finance Corp. a wholly-owned subsidiary of Household, by one notch to A from A+, equalizing the rating with that of its parent. And, Fitch said, the long-term rating outlook of all entities of Household has been revised to negative from stable. Over $65 billion of rated debt is affected by these actions.

The rating action on the finance unit, Fitch said, reflects an evolution in the agency's perspective with respect to ratings distinctions between a parent company and its subsidiaries. The perspective incorporates Fitch's belief that due to the parent's typical control of the subsidiary and its resources, timely interest and principal payments are at best in a relatively equal position whether at the holding company or an operating subsidiary. As a result, today's action has equalized the ratings of the finance company with Household. The change is not a result of underlying credit changes at Household Finance. Notwithstanding favorable developments, the rating outlook revision centers on the growth of Household's real estate secured near-prime/subprime loans and the impact on balance sheet flexibility in times of stress, Fitch said. Fitch's analysis of the finance company universe has increasingly emphasized the importance of firm's demonstrating an ability to maintain continual financial accessibility, particularly in times of economic stress, be it a company specific event or a secular change in a given industry. Methods to gauge accessibility to alternative sources of capital would be participation in secondary market activity, such as whole loan sales and/or asset securitization, Fitch said.

Future rating actions will factor in Household's demonstrating successful execution of securitizations of real estate secured loans in the future, Fitch said. Also, Fitch will monitor the company's commitment to continue building capital ratios to appropriate levels given its existing risk profile. If these actions are effectively demonstrated, the rating outlook could be revised back to stable in the upcoming year, the rating agency said.

Household said in a statement responding to the Fitch actions, "We are disappointed that Fitch changed its rating outlook on Household due to concerns about our ability to securitize real estate secured and unsecured consumer loans. Household has always placed a great emphasis on liquidity and has long accessed a diverse funding base of unsecured short-term debt, commercial paper, term funding and the asset-backed market to fund its operations. Household has successfully securitized $3.5 billion of unsecured consumer loans, which represents 23 percent of its U.S. unsecured portfolio. Since 1999, the company also securitized $2.2 billion of closed-end real estate loans, which have been accounted for as financings. In its 2002 financing plan, the company had already planned to securitize a larger amount of the real estate portfolio. To demonstrate its ability to securitize its real estate product, Household will increase the level of 2002 securitization otherwise planned. These transactions will be structured consistent with the current program for real estate secured products, thus the company will record no gain on sale associated with these financings. Household is committed to working with Fitch to have its rating outlook revised back to stable in the upcoming year."

Fitch rates Teco convertibles at BBB+

Fitch assigned a BBB+ rating to TECO Energy Inc.'s $400 million of mandatory convertible trust preferred and said the rating outlook is negative. TECO's ratings reflect an increase in leverage and business risk resulting from growing investments in unregulated activities, particularly independent power projects and TECO's exposure to National Energy Production Corp., an indirect subsidiary of Enron, as the engineering and procurement contractor on several of the company's merchant generation projects, Fitch said. The Chapter 11 filing by Enron allowed the banks to stop funding the projects for which NEPCO is the contractor. While TECO is negotiating with the banks for a waiver, a source of funding is still uncertain, Fitch said. Resolution is likely to result in amendments that will shift additional risk to TECO. While Fitch said it gives considerable equity credit to the issue of mandatory convertible securities, additional equity is needed to maintain a capital structure consistent with the rating. Fitch expects TECO to issue additional common equity before year-end to strengthen the balance sheet.

Moody's downgrades Kmart three notches, still on review

Moody's Investors Service downgraded Kmart Corp., affecting $4.7 billion of debt securities, and kept the company on review for further downgrade. Ratings covered by the action include: Kmart's senior unsecured debt and medium-term notes, cut to B2 from Ba2 and its lease certificates, cut to B3 from Ba3;

Moody's said its downgrade reflects Kmart's "continuing weak operating performance and a widening competitive gap against its peers, as well as uncertainty about the prospects of Kmart's franchise longer term and the traction of its turnaround strategy.

"Additionally, Kmart's discussions with its bank lenders, critical to financing its 2002 inventory build, are likely to result in the effective subordination of the senior unsecured debt."

Flat sales through December compared to last year and a 1% decline in December itself indicate that Kmart is continuing to lose share to its competitors, Moody's said. It also faces aggressive real estate expansion by Wal-Mart, Target and others with better operations and financial flexibility.

"It is not clear when management's turnaround strategy will gain traction, and it may require Kmart to downsize its store base and/or to increase debt in order to finance necessary improvements in its still weak supply chain systems and store operations," Moody's commented.

The rating agency believes Kmart's bank lenders are likely to seek a security interest in Kmart's assets in order to renew or extend the bank facilities that mature in the latter part of 2002. "The granting of a security interest would cause effective subordination of the senior unsecured debt," Moody's said.

Fitch rates Owens-Brockway notes BB

Fitch assigned a BB rating to the new senior secured notes to be issued by Owens-Illinois' Owens-Brockway Glass Container Inc. unit. It also confirmed Owens-Illinois' $4 billion of secured credit agreement at BB, its $1.7 billion of senior notes at B+ and its $453 million of convertible preferred stock at B-. The outlook remains negative.

Fitch noted that the new notes will be secured by all the domestic assets but not foreign subsidiaries whereas the bank loans are secured by substantially all the domestic assets and 65% of stock of first-tier foreign subsidiaries. This results in access to 60% of cash flow versus 100% for the credit agreement and collateral of 50% of Owens-Illinois' assets versus 50% of Owens-Illinois' assets 65% of stock of foreign subsidiaries.

As $650 million of senior unsecured notes come due over the next 18 months, Fitch expects Owens-Illinois to refinance it using senior secured notes. At the moment there is enough collateral that Fitch does not believe a rating differential is needed between the notes and the bank loan but that could change if enough senior secured notes are issued.

Fitch said the negative outlook reflects uncertainties about Owens-Illinois' asbestos exposure.

The rating agency noted Owens-Illinois has been "proactively seeking out claims at more favorable settlements, and expects total expenses to start declining over the next few years."

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